Unrealistic valuations are the biggest mistake made by business owners. When the decision to sell a business is made, the price tag placed is one based on many factors, but can often be overestimated by a business owner, who is undoubtedly biased when it comes to considering the value of their company.
This is important to rectify, because an unrealistic valuation can impact the sales process significantly. It’s important, then, that you rectify this as early as you can in the sales process.
Potential sale harm
Placing the price tag too high for a sale can be a huge mistake, because it locks people out who could potentially buy it, but won’t because the price is too high. Often, people who have the money for the purchase might not follow through on the basis the business is not worth the amount asked for. Inevitably, your business will sit still in the market, and could go stale, which will cause the price to decrease naturally to a point that was even lower than fair.
Being greedy in your sale and hoping that perhaps you will be bartered down to slightly more than it is worth is not a good route to take. Less aggression in the sale relating to the price tag makes more sense than going high, which might result in removing it from the market due to lack of interest.
Understanding your business worth
You must understand that a real valuation of your business is not what the owner believes it is worth. A business must grasp that a buyer will only pay what it is worth, and won’t consider your personal bias towards the price.
It is only natural for owners to think their business is worth more than is realistic. Here are some reasons why this occurs.
- Emotional ties
It is fair to understand that many business owners are attached to their businesses personally and physiologically. This is especially true for family style businesses.
Undoubtedly, many owners have invested more than just money into their venture. Owners have the tendency to see this business as one of their family members, looking at it like a proud parent might look at a child. This kind of emotional tie, though beautiful and often warranted, can be damaging when reflected in the valuation, as it creates a disconnect with market realities.
- Unproven success
Businesses in their early stages – or high growth companies – may not have proven their business model yet. Most businesses, especially small ones, are purchased based on historical performance rather than projections. It’s important to be aware that you need to be able to count on at least three years of sustained performance at elevated levels before you can factor in investments made to grow the business in the sale price.
- Needs-based
It is not unheard of for business owners to reverse engineer their business price for the amount they want/need. If the purchaser is knowledgeable, which they most likely are, they will not strike a deal over a value like this. They’ll want to pay what the business is worth.
- Lack of analytics
Many buyers have purchased a business based on their feelings alone, and have overpaid for it. Following this, knowing what they paid and then setting their own valuation based on this, they might overestimate its worth. This is not a criterion for prospective buyers. Cash flow is usually the main reason for a purchase. Rarely is the original purchase price a factor in a new buyer’s decision.
You absolutely must remove your emotions, bias, and the past from your decision to sell and the valuation you place on your business, and only put it up for sale for a realistic price. Anything else would be a disaster.
How do you value your business?
People who want to buy your business are only really interested in certain things, like what it is earning and what future earnings look like.Growth and profit are the key points here. In fact, they are all that matter in most cases. Does the business have good cash flow? A diverse client base? Is it a growing industry? These are the questions buyers want answers to in order to satisfy their decision.
Savvy buyers won’t buy into unrealistic potential. It might strike interest, but we are usually talking about a lot of money, so the decision will not be taken lightly. Potential will not appear in a buyer’s evaluation which, if they have any sense, will include a lawyer’s input.
What is a realistic valuation?
The first step to understanding a realistic valuation is to seek expert advice before you put it on sale. This will help you determine whether or not it is worth putting your business up for sale in the first place.
You need a professional to help you form your valuation. They’ll understand the industry, and know what variables and factors play a part in the overall worth of your business. They’ll be able to advise you on what you can do in order to increase its value.
There is no excuse for an unrealistic valuation. It can be easily avoided by employing the proper professionals, and this will lead to a speedier sale.
That means you can move quickly onto your next venture, whatever that may involve.